2018 (12) TMI 679 - AT - Income Tax

Upward adjustment u/s 92C - Comparable selection - Held that - Exclusion of CGAAVK Software & Export Limited is concerned, it has been rejected as consistently loss making concern which is clearly incorrect, because once foreign exchange gains are to be included as operating income which is what ought to be done, the figures at page 33 of CIT(A) s order itself show profitability in the financial year 2008- 09, 2010-11 and 2012-13. In our considered view, therefore, CGA-AVK Software & Export Limited was wrongly excluded. We direct the Assessing Officer to include the same in the list of comparables. As regards the question as to whether foreign exchange gains are to be included in operating profits or net, the issue is settled in favour of the assessee by a co-ordinate bench decision in the case of ITO vs. EDAG Engineers & Design India Limited 2015 (3) TMI 235 - ITAT DELHI - We accept the plea, and remit the matter to the file of the Assessing Officer to verify whether, upon the above directions being implemented, margin will be less than 5%. If so, the entire ALP addition will stand deleted. In any other case, the ALP adjustment will stand modified suitably. Addition u/s.36(1)(va) r.w.s. 2(24(x) towards late payment of employees contribution to PF & ESIC - Held that - while any delayed deposit of PF/ESI is to be disallowed, in terms of case of Gujarat State Road Transport Corporation (2014 (1) TMI 502 - GUJARAT HIGH COURT), the question as to whether there is a delay or not may be decided by the Assessing Officer in the light of above observations by the coordinate bench. The assessee will get relief, if found admissible, on that basis. Disallowance under section 14A - Held that - Only elementary that for the purpose of computing administrative expenses to be disallowed under rule 14A r.w.r. 8D, only such investments are to be taken into account as yield tax exempt income. The 0.5% of investments is to be treated as inadmissible administrative expenses under rule 8D must therefore be computed with respect to equity funds Mutual Funds only. The plea of the assessee is thus indeed well taken and meets our approval. We remit this issue also to the file of the Assessing Officer for recomputation of disallowance under section 14A r.w.r. 8D in the light of above observations.

Summary

Issues:
1. Upward adjustment under section 92C of the Income Tax Act, 1961.
2. Addition made under section 36(1)(va) r.w.s. 2(24)(x) for late payment of employees' contribution to PF & ESIC.
3. Disallowance under section 14A of the Act.

Issue 1: Upward Adjustment under Section 92C:
The appellant challenged the correctness of the order passed by the CIT (A) regarding the upward adjustment under section 92C of the Income Tax Act. The Assessing Officer made an arm's length price adjustment for services provided to associated enterprises, which was quantified at ?47,11,618. The method used was Transactional Net Margin Method (TNMM). The dispute was related to comparables and the exclusion of foreign exchange from operating revenue. The ITAT noted that the exclusion of CGA-AVK Software & Export Limited was incorrect as it had shown profitability in certain financial years. The ITAT directed the Assessing Officer to include it in the list of comparables. Additionally, it was established that foreign exchange gains should be treated as part of operating profits based on legal precedents. The ITAT allowed the appeal and remitted the matter to the Assessing Officer for further verification.

Issue 2: Addition for Late Payment of Employees' Contribution:
The appellant contested the addition made under section 36(1)(va) r.w.s. 2(24)(x) for late payment of employees' contribution to PF & ESIC. The ITAT found that a co-ordinate bench decision favored the appellant, citing a judgment related to delayed deposit of employees' contribution to PF. Following this decision, the ITAT remitted the issue to the Assessing Officer for readjudication based on the observations provided. The ITAT allowed the appeal in this regard for statistical purposes.

Issue 3: Disallowance under Section 14A:
The grievance raised by the appellant was related to the disallowance under section 14A of the Act. The Assessing Officer included investments not yielding tax-exempt income in the computation of administrative expenses, which was confirmed by the CIT (A). The ITAT determined that only investments yielding tax-exempt income should be considered for computing administrative expenses under rule 14A r.w.r. 8D. Therefore, the ITAT directed the Assessing Officer to recompute the disallowance under section 14A r.w.r. 8D considering only equity funds Mutual Funds. The ITAT allowed the appeal for statistical purposes.

In conclusion, the ITAT allowed the appeal for statistical purposes on all three issues, directing the Assessing Officer to take necessary actions as per the observations and legal precedents presented during the proceedings.